Latest VAT Update (Autumn 2015)
Gemma McCaldon-Gower, VAT Manager provides an insight into the question of business vs non
business in the Longbridge on Thames case - has anything changed?
HMRC has received permission to appeal to The Court of Appeal over the decisions made by both the First Tier and Upper Tax Tribunals regarding charity Longbridge on Thames. These tribunals had found that Longbridge was not in business for VAT purposes and could therefore have a new building constructed on a VAT zero rated basis.
From the introduction of VAT to the present day the question of whether charities undertake activities by way of business has been a tricky one. HMRC has never provided clear guidance on this issue and the tax tribunals often provide contradictory decisions when asked to do so.
A major area of disputes between HMRC and the charity sector has been whether the absence of a profit motive and the pursuance of an activity in furtherance of a charity’s aims and objectives constitutes a business activity.
HMRC has consistently maintained that where there is a supply of goods or services in return for a consideration there is a business activity even where the supplier is a charity pursuing its aims and objectives and not seeking to make a profit from that activity. Notwithstanding this, the VAT Tribunals arrived at decisions in cases such as Yarburgh and St Pauls in favour of the charity concerned, placing reliance on the lack of a profit motive and the fact that each charity was following their charitable aims and objectives.
So why am I musing on this issue now?
In 2009 the European Court released its judgement on the “Finland” case which HMRC believes supports its view that if there is a supply of goods or services for a consideration it should be regarded as a business activity even if there is no intention to make a profit.
The “Finland” case considered whether the provision of legal services to individuals (under the Finnish equivalent of legal aid), was a business activity where consideration was based on the individual’s ability to pay and in no case exceeded 75% of the cost of the services. In other words, there was always a charge made for the services provided, but never an intention to make a profit. The European Court ruled that notwithstanding the absence of a profit making motive there was a supply of legal services in return for a payment from the recipient.
Returning to Longridge, it appears that they do make supplies of goods and/or services for a consideration, but the First Tier and Upper Tax Tribunals have both accepted that the absence of a profit motive and the pursuance of their charitable aims and objectives meant that the activities undertaken by Longridge were non business following the principles laid down in Yarburgh and St Pauls, effectively ignoring the European Court judgement in the “Finland” case.
As I mentioned at the start of this article, HMRC has received permission to appeal Longridge to The Court of Appeal and therefore for the first time in a number of years the business/non-business issue will be considered by senior UK judges. It will be interesting to see what their decision is and we may yet receive some proper guidance from the courts as to what constitutes a business activity and therefore some much welcome clarity on this issue. Watch this space.
For further information, contact Gemma McCaldon-Gower.